Based upon last years returns, my projected income for this year, and my understanding of the child tax credit, we will be in the phase out band for the child tax credits for the foreseeable future. I am presently maxing out my TSP contributions as well as Roth IRAs for both myself and my DW. Of my TSP contributions, about $100 per pay period (every two weeks) is of the Roth TSP variety. I'm basically giving up $150 - $200 worth of the tax credit each year, depending on how the numbers round out, for the opportunity to make Roth TSP contributions.

Would it make more sense to max out my tax deductions now and do everything pre-tax? If we did, I would probably just apply the additional take home pay towards my daughters' 529 accounts. Or should I say to heck with the child tax credit and do an even larger portion of my contribution to the Roth TSP if I can afford it?

I had a similar issue when analyzing taxes and what helped me a lot was going into TurboTax and figuring out the marginal rate on those dollars in question. You might find that pre tax vs post tax on say the last 5k of income has a 35% marginal rate. Without trying to figure out long term roth or not, you might intuitively be able to make a judgment given your personal marginal rate.

livesoft wrote:So you are saying you like to throw away $150-$200 a year? Even I would not do that.

Go 100% TSP and 0% Roth TSP.

It's not effectively being thrown away; the child tax credit phase-out is a 5% increase in your marginal tax rate.

Still, if that means a 33% marginal tax rate, then the traditional TSP is better than the Roth TSP when you expect to retire in the 25% or 28% tax bracket, even if you max out the traditional TSP and have to do some taxable investing.

Your marginal rate is probably 30% federal + state. The child tax credit phases out above AGI $110,000 at a rate of one child thrown overboard for every $20,000 of AGI, so if you have three kids under the age limit your phaseout would be $110,000 - $170,000. It's possible if you have even more kids to be in the 28% bracket and the phaseout, but if you're giving up <$200 of the credit your AGI must be around $114,000 which puts you low in the 25% bracket (so 30% with the phaseout effect).

The phaseout is not inflation-adjusted.

I suggest going all traditional TSP or switching your wife, if she's not covered by an employer plan, to a deductible spousal TIRA, for which the MAGI phaseout is $178,000 - $188,000 (and that phaseout is inflation-adjusted).

The opinions are clearly in favor of "defer taxes". Taking that as good (and free ) advice, I'll trust my fate to the wisdom of the crowd and update my TSP allocation tomorrow. That said, I would really like to get my head around whether it's better to take it on the chin now with the child tax credit or to wait 30 years and take it on the chin when I have a larger (all?) portion of my SS taxed or some other benefit phase out. Without speculating on what the law may be in the future, what are the major factors that I should consider based upon current law?

I haven't tried using Turbo Tax (which I do use) to assess my marginal rate, but we will be in the 25% bracket and with the 5% add on for the child tax credit phase out that puts us at a minimal 30% marginal rate.